Middle-East Journal of Scientific Research 15 (9): 1295-1300, 2013

ISSN 1990-9233
IDOSI Publications, 2013
DOI: 10.5829/idosi.mejsr.2013.15.9.11511

Stock Selection Behavior of Individual Equity Investors in Pakistan

Imran Ali and 1Kashif Ur Rehman1

1,2

IQRA University Islamabad Campus, Pakistan

COMSASTS Institute of Information Technology Lahore, Pakistan
1

Abstract: This study examines the stock selection behavior of individual equity investors in Pakistan.
The study provides very important information to investment advisor regarding stock selection behavior of
small equity investors in Pakistan. The understanding of investors behavior also enables equity market
regulators to improve regulator environment that best suits the stakeholders. It also provides pertinent
information to corporations listed in stock markets of Pakistan to attract investors. The study identifies stock
attributes including dividend, price trends and volatility, firms status in the market, source of recommendation,
corporate reputation, corporate social performance, firms visibility in the media having significant on stock
selection behavior of individual equity investors in Pakistan.
Key words: Investor behavior

Stock selection behavior

INTRODUCTION
Behavioral finance is also one of the significant
developments in the field of finance in recent times.
Behavioral finance uses social cognitive and emotional
factors in understanding investor behavior. Behavioral
finance has gained notable attention in recent years in
explaining influence of investor psychology on
investment decision making. Studies focusing individual
investor behavior were firstly appeared around 1980s.
Its main focus is on psychological aspects employed by
investor to make investment decision. Theory which
defines behavioral finance is presented by [1]. Kahneman,
D. and A.Tversky, 1979 [2] hold that investor may not
appear to be as rational for investment as supposed to
be. These Behaviorists are of the opinion that
investors behave irrationally while making investment
decisions. They based investors decision making
process on overconfidence, overreaction, mental
accounting, anchoring and herd behavior [3]. Shefrin,
H. 2000 [4] defined behavioral finance as a rapidly
developing area that contracts with the influence of
psychology on the behavior of financial professionals.
Behavioral finance goes on to relax and even in some
cases to abandon the theories of traditional finance like
rational behavior, efficient market hypothesis and random
walk theory. It does not reject the theories offered by
traditional finance, but deepens the concepts to

Stock attributes

Pakistan

comprehend and clarify the investors behavioral

characteristics. Behavioral finance outlines the
shortcomings of traditional finance relevant to rational
acting of investor. It integrates the psychological and
social factors relating to investor in financial models and
relates them with situational factors in order to find their
relevance to capital market participants.
Plenty of research is documented on investor
behavior in the literature of behavioral finance, however,
majority of research focus on psychological aspect of
investor behavior. Very little research focuses on the
stock selection behavior of individual equity investor.
This study fills this gap by investigating the stock
selection behavior of small equity investor in the context
of Pakistan.
Background, Theoretical Framework and Hypotheses:
Stock Attributes and Investor Stock Selection Behavior:
Numerous studies in behavioral finance literature support
the influence of various attributes on stock selection
behavior or individual equity investor. For instance, [5, 6]
hold that dividend events induce retail investors
attention-driven buying and that retail investors exhibit
abnormal behavior following dividend announcement.
Lee, C. M. C. 1992 [5] also found that small traders buy
after earning surprises, weather good or bad and that they
react later than large investors do. Shefrin,H.2000[4]
inserted that investors enthusiastically and actively

Corresponding Author: Imran Ali, IQRA University Islamabad Campus, Pakistan

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Middle-East J. Sci. Res., 15 (9): 1295-1300, 2013

sought those stocks who offer higher dividend and

growth, termed as value stock. [7] asserted that dividend
could affect the activity of stock at the market. Brav, A.
J.R.Graham, C.R.Harvey and R.Michaely, 2005 [8] reported
that individual equity investors prefer dividend-paying
stocks. Current research also hypothesis that individual
equity investor are influences by higher dividend
announcements and yields in their investment decision
process.
Management competency is another attribute that
individual equity investor may consider in making his/her
investment decision. The competent management holding
good skills is indispensable for the growth of business at
higher level of success. Competency and commitment of
management can be ensured by a share ownership and
other performance based inducements. Managers of
demonstrated talent having successful career record
conveys clear message to investors to take advantage. [9]
also investigated the effects of management competency
one of strongest stock attributes that influences the
investment behavior of individual equity investor.
Literature supports that industry structure is a key factor
for growth and effects firm performance and hence
provides an incentive for investor to invest in that
industry. Industry structure includes intensity of
competition among rival firms. Intense competition in any
industry can cause price lower than c osts and
industry wide losses. Factors contributing towards
intensity of rivalry in the industry include diversity of
competitors, firm concentration, entry and exit barriers
and excess capacity [10]. Dreux, D.R. 1992 [9, 11] also
hold that growing industries are evaluated as an
attractive investment opportunity by equity investors.
Knowledge about company products and services and
personal experience of consuming corporate products is
also another important attribute that individual equity
investor incorporates in their investment decision
making. Similarly, satisfied and loyal investors also
purchase more products of the same corporations.
Antonides, G. N. L. Van Der Sar, 1990 [12] found that
investor preferred the stocks of those corporations
for which they have personal experience or knowledge
they also play more value for knowing company
products.
Individual investors usually buy stocks having
upward price trends and sell stocks having downwards
prices trends without having sufficient fundamental and
technical analysis, this is called herding behavior in
behavioral finance. Antonides, G. N. L. Van Der Sar, 1990
[4] also suggested that investor are less likely to buy

stocks with prices moving downward and sell stock

whose prices are moving upward Lucey, B. M. and M.
Dowling, 2005 [13] investigated the relationship between
equity prices and investor behavior and argued that
equity prices have reciprocal effects on equity investor
behavior. Market status refers to growth potentials of
corporation as compared to its competitors in the same
industry; these highly growing stocks are also known as
blue chips and are preferred options for investment.
Equity investors evaluate factors that are important for
the success of the business and discover the areas in
which the firm occupies long term comparative lead on
other firms in the same industry or sector. This
competitive lead may be towering share in the market,
intellectual property, strong brands or technological
advantage. Theories of behavioral finance assume that
individual equity investors are not always rational and do
not incorporate industry, fundamental and technical
analysis in investment decision. This has also been
documented by many researches that individual investor
mostly rely on recommendations of his stock brothers,
fellow traders or some friends. Stockbrokers are generally
preferred sources of advocate recommendations on which
individual equity investor base their investment
decisions. This also separates investors from speculators;
investor relies on their own technical or fundamental
parameters whereas speculators base their investment
decisions on speculations and rumors prevailing in the
market.
Another attribute that individual investor considers
while investing his/her money in stocks of any
corporation is the principal place of operation of that
corporation. Individual investors tend to be more loyal to
their economy and avoid investing in those companies
which are not based in their homeland. [14] also found in
their survey of Australian investors that individual
investor prefer to invest in those companies based in
Australia than those companies located abroad. Many
authors in different fashions have defined corporation
reputation. [15] believed corporate reputation as a set of
collectively held beliefs about a companys ability and
willingness to satisfy the interest of various stakeholders.
[16] presented a general definition and stated that
corporate reputation is a stakeholders overall evaluation
of a company over time. Corporate reputation can be
used to gain favor of various stakeholders including
customer, employees and investors. For instance, [1]
found significant influence of corporate reputation on
customer satisfaction and retention in the cellular industry
of Pakistan.

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Majority of literature is connecting CSR this with

improved financial performance of organization, for
instance, [17] argued that corporate environmental
considerations improve business performance. [18] also
found strong association between CSR accomplishments
and corporate financial performance. Other researches on
CSR included the influence of CSR on customer behavior.
Researchers found that CSR influence customer purchase
behavior for instance, [19, 1] also found strong
association between corporate social responsibility,
investor satisfaction and investor loyalty in the context of
Pakistan. Investor relations management experts believe
that good investor relations contribute to the fair
evaluations of firms by investors. [20, 8] argued that good
investor relations are beneficial for attracting investor and
lower the cost of capital for corporations. Normally
individual retail investors are considered less important
for relationship management and more focus is given to
large institutional investors. [8] found in their survey that
individual investor are difficult to target for investor
relations management services because they hard to
manage due to their large numbers and low quantity of
stock holdings. Firm visibility and publicity or
advertising, is also another important factor that influence
decision making of individual equity investor. Companies
frequently appear in the media not only to attract its
customers, but also to communicate important message to
its potential future investors. The objective is to memorize
the name of corporation to the potential investor and
build strong image. [6] shown that small investors are
more prone to buy attention clutching stocks. [21]
showed significantly positive relationship between annual
advertising budget with breadth of share ownership and
firms liquidity, suggesting that investor seems to hold
shares of those companies with whom they are more
familiar.
Research Hypotheses: On the basis of above theoretical
discussion, the following research hypotheses are
developed.
H1: Dividend is having significant relationship with
investor's stock selection behavior.
H2: Firm's management competence stock attribute is
having significant relationship with investor's stock
selection behavior.
H3: Firm's growth perception in the industry is having
significant relationship with investor's stock selection
behavior.

H4: Knowledge of corporations products stock attribute

is having significant relationship with investor's stock
selection behavior.
H5: Price trends and volatility influence significantly on
investor's stock selection behavior.
H6: Firm's status in the market influence significantly on
investor's stock selection behavior.
H7: Investors stock selection behavior is influenced
significantly by recommendations from others.
H8: Investors stock selection behavior is influenced
significantly firm's principal place of operations of the
corporation.
H9: Corporate reputation is having significant impact on
investor stock selection behaviour.
H10: Individual equity investor's stock selection
behaviour is positively affected by social performance of
corporations.
H11: Individual equity investor's stock selection
behaviour is positively influenced by investor relations
management by the corporation.
H12: Individual equity investor's stock selection
behaviour is positively affected by visibility or publicity
of corporation in the media.
MATERIALS AND METHODS
The study empirically tested the stock selection
behavior of individual equity investors. Primary data is
collected through personally administered survey
technique from 470 individual equity investors trading in
all three stock exchanges of Pakistan, namely; Karachi
stock exchange, Lahore stock exchange and Islamabad
stock exchange. The dependent variable individual equity
investor decision making is measured by an instrument
adopted from [22]. The instrument to measure stock
attributes including dividend, yield, management team
competence, industry sector, knowledge about company,
price trends and volatility, market status, sources of
recommendations, principal place of operations, are
adopted from [14] who used conjoint analysis approach
to determine question items. The instrument to measure
corporate reputation is adopted from [23] who used the
instrument development methodology proposed by [9] for

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content specification of the construct. The construct of

the CSP is adopted from [24]. The instrument contains
5 items incorporating labor practices, environmental,
social and stakeholders aspects. The instrument to
measure firm visibility and publicity and investor relations
management has been adopted from [8], the instrument
contained 10 items. All items are measured on 5 point
Likert scale.
RESULTS AND DISCUSSION
The reliability analysis of data is performed through
latest version of SPSS and values of Cronbach Alpha [25].
hold that the value of Cronbach alpha should be greater
than 0.5 and reflects the acceptable reliability of data in
social sciences. The Cronbach alpha of all variables
including dividend and yields, management team
competence, firm industry/sector, knowledge about
company, price trends and volatility, firm's market status,
source of recommendations, firms principal place of
operations, corporate reputation, corporate social
performance, investor relations management, firm visibility
in the media and individual investor behavior are 0.84,
0.77, 0.76, 0.83, 0.88, 0.74, 0.75, 0.82, 0.89, 0.85, 0.64, 0.89
and 0.74 respectively. Therefore, all scales used in this
study are found reliable and can be used for analysis
purposes.
The results of Structural Equation Model presented
in Table 1 show the decisions of hypotheses testing.
Hypothesis 1 in this study is related to influence of
dividend and yield stock attribute on individual equity
investors decision making process. The SEM path
between dividend
and
yields
and investor
decisionmaking process shows positive and significant
relationship with P value (.044) which is less than

0.05 with positive values of estimate and standard error,

we therefore accept our H1. The result shows that stocks
offering higher dividend and yields influence individual
equity investors decision making behavior. The second
path represents the relationship between firms
management team competence and individual equity
investors behavior. The SEM results for this path shows
insignificant influence of firms management team
competence on individual equity investors trading
behavior P value (0.194), we therefore, reject our H3. This
implies that individual equity investors do not consider
firms management team competence stock attribute in
their equity investment decision making. The third path in
SEM analysis is related to firms industry or sector from
which it belongs and its influence on equity investors
behavior as depicted in our H3. SEM results shows
positive and significant influence of firms industry or
sector on individual equity investors decision making
behavior P value (0.039), leaving our H3 accepted as well.
This result implies that industry or sector having higher
growth potentials are seen positively by equity investors
and individual equity investors of Pakistan also consider
firms industry of sector before making their equity
investment decisions.
Next SEM path elaborates the influence of investors
knowledge about company products or services on
his/her investment decision making as presented in our
hypothesis 4. The result presented in Table 4.14 depicts
insignificant P value (0.192) means that investors
knowledge about companys products or services has
no influence on equity investors decision making, we
therefore reject our H4. Hypothesis 5 proposes the
influence of price trends and volatility stock attribute on
individual equity investors behavior. The SEM results
show positive and significant influence of price trends

Table 1: Regression Weights

Paths

Hypotheses

Estimate

S.E

Decision

I.D. Making

<---

Dividend and Yields

H1

.064

.038

.044

Supported

I.D. Making

<---

Management Team Competence

H2

.053

.041

.194

Not Supported

I.D. Making

<---

Firms Industry/Sector

H3

.096

.047

.039

Supported

I.D. Making

<---

Knowledge about Company

H4

.051

.039

.192

Not Supported

I.D. Making

<---

Price Trends and Volatility

H5

.089

.037

.015

Supported

I.D. Making

<---

Firms Market Status

H6

.119

.049

.019

Supported

I.D. Making

<---

Source of Recommendations

H7

.306

.043

.000

Supported

I.D. Making

<---

Principal Place of Operation

H8

.037

.034

.278

Not Supported

I.D. Making

<---

Corporate Reputation

H9

.126

.038

.001

Supported

I.D. Making

<---

Corporate Social Performance

H10

.090

.035

.010

Supported

I.D. Making

<---

Investor Relations Management

H11

.063

.051

.218

Not Supported

I.D. Making

<---

Firm Visibility in the Media

H12

.072

.035

.039

Supported

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Middle-East J. Sci. Res., 15 (9): 1295-1300, 2013

and volatility stock attribute on investor behavior (P value

0.015) leaving our H5 accepted. This finding is quite
logical, as equity investors are considered risky investors
as compared to investors of other financial assets, for
instance, bonds and other financial instruments.
Hypothesis 6 proposes the influence of firms market
status stock attribute on individual equity investors
behavior. The SEM results shows positive and significant
(P =.019) relationship between firms market status and
equity investors behavior, leaving our H6 accepted. This
finding shows that firms enjoy good status in the stock
market are given more preferences by equity investors.
The next hypothesis proposes the linkage between source
of recommendations and equity investor decision making
as presented in H7. SEM analysis shows positive and
highly significant association between source of
recommendation and investor decision making (P = 0.00),
we therefore accept our H7. This shows that source of
recommendation is the most significantly influencing
factor on individual equity investors in Pakistan.
Hypothesis 8 proposes influence of principal place of
operations stock attribute on equity investors behavior
in this study. The SEM results shows insignificant
influence of principal place of operation stock attribute on
investor behavior (P = 0.278), we therefore reject our H8.
This implies that individual equity investors in Pakistan
do not consider place of operations of company and are
willing to invest in any corporations having their principal
operations any country. The next hypothesis in this study
links the path between corporate reputation and equity
investor behavior. The SEM result for this path depicts
positive and significant (P =.001) influence of corporate
reputation on individual equity investors decision
making, we accept our H9 therefore. Analysis shows that
corporate reputation is the stock attribute having second
highest influence on investors behavior after source or
recommendation.
Next hypothesis 10 is related to influence of
corporate social performance on individual equity
investors decision making behavior. The SEM results
also shows significantly positive influence of corporate
social performance on individual equity investors
behavior (P =.010) leaving our H10 accepted as well.
This finding is very pertinent in this study, it implies that
individual equity investors consider social performance
of corporations in their equity investment decision
making. The next, hypothesis proposes the influence of
investor relations management on investors behavior.
The SEM results shows insignificant (P = 0.218) influence
of investor relations management on individual equity

investors decision making behavior, resulting rejection of

our H11. The final path in our model is related to influence
of firms visibility in the media stock attribute on
individual equity investors decision making in the
context of Pakistan. The SEM results provides positively
significant influence of firms visibility in the media on
individual equity investor decision making, we therefore
accept our H12 as well.
CONCLUSION
The objective of this study is to investigate the stock
selection behavior of individual equity investor and the
influence of various stock attributes on investor behavior.
The study identifies stock attributes including dividend,
price trends and volatility, firms status in the market,
source of recommendation, corporate reputation,
corporate social performance, firms visibility in the media
having significant on stock selection behavior of
individual equity investors in Pakistan. However, some
stock attributes including; management team competence,
knowledge about company products and services, firms
principal place of operation and investor relations
management do not have significant influence on stock
selection behavior of individual equity investors for the
case of Pakistan. The study provides important
information to investment professionals, stock market
regulators and companies listed on stock exchanges of
Pakistan. The findings of this study can be used to attract
investors and increase their participation in equity market
of Pakistan.
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